Eagle Bulk Shipping: Value Stock, Or Value Trap?

Eagle Bulk Shipping Inc. (NASDAQ:EGLE)engages in the ocean transportation of various bulk cargoes worldwide. The company owns a fleet of 45 oceangoing vessels comprised of 43 Supramax and 2 Handymax vessels with a combined carrying capacity of 2,451,259 deadweight tons. Currently, the company has a market capitalization of just under $77 million and an average daily volume of 1.3 million shares.

Like the majority of its peers, Eagle Bulk Shipping Inc. (NASDAQ:EGLE) trades at discount to book value. However, care needs to be taken when evaluating a shipping company based on its discount to book value alone. Indeed, many of the shipping companies currently trading below book are hemorrhaging cash and issuing stock to bolster cash flows. I won’t mention any names in particular, but some of these companies do look to be classic value traps.

Eagle Bulk is different

Nonetheless, it would appear that Eagle Bulk Shipping Inc. (NASDAQ:EGLE) is different. Based on the company’s fiscal second quarter numbers, Eagle Bulk has assets of $1.78 billion and liabilities of $1.18 billion. Long-term debt makes up the majority of the company’s total liability figure, standing at $1.16 billion. What’s more, the company has $53.6 million in cash and short term assets on its balance sheet and a current ratio of two. So, the company looks to be financially safe for the next 12 months at least. Debt as a percentage of assets works out at around 65% and interest costs were covered 1.2 times by EBITDA during the first six months of this year.

In addition, shareholder equity works out at around $601 million, or $35.97 per share, indicating that at current levels the company is trading at a price-to-book ratio of 0.13 – a huge margin of safety.

But aside from a strong balance sheet, why is Eagle Bulk so appealing? Well, surprisingly the company has been one of the few shipping companies to remain profitable from 2008 to 2010 and operating cash flow positive since 2008. Indeed, this means that apart from the funding of new ships back in 2010, (in hindsight a bad decision) the company has not issued any new debt or stock to fund operations since 2008.

Eagle Bulk is an interesting play

Eagle Bulk is an interesting play as it would appear that the company has managed to avoid much of the turbulence suffered by its peers during the past five years. Additionally, as the company is currently trading at such a huge discount to book value, the margin of safety here is appealing. As a play on the recovering dry bulk shipping market, Eagle Bulk looks well placed to ride the recovery. Furthermore, investors need not worry about equity dilution or crippling debt issuance while they wait for the market to recover as Eagle continues to turn a profit.